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FDO AT A GLANCE

P/E ► 13.7 LOW EV/EBITDA ► 7.52 LOW ROA ► 11.1% HIGH ROE ► 21.6% HIGH Debt to Equity ► 0.974 AVG Current Ratio ► 1.51 LOW Interest Coverage Ratio ► 35.9 AVG

 

 

 

 

 

 

Family Dollar Stores (NYSE: FDO) is a discount variety retailer operating 6,643 stores in 44 states as of March 2009.^[1] Most of the merchandise the company sells ranges from less than a dollar to around $10 in price, with the majority under $1 per unit.^[2] The company's strategy is to target low to lower-middle income households with cheap consumables and home goods.

This customer base places FDO in a prime position to reap benefits during the U.S. recession which started in late 2007 and is still going on in early 2009,^[3] as consumers with less disposable income look for lower-priced goods. The company competes for price-conscious shoppers in a nearly saturated market, which is dominated by big-box retailers like Wal-Mart Stores (WMT) and Target (TGT) as well as comparable discount store companies Dollar Tree Stores (DLTR), Dollar General (DG), Big Lots (BIG) and 99 Cents Only Stores (NDN). As a dollar-store retailer, FDO has little ability to increase prices to compensate for any changes in input costs. Additionally, FDO is trying to differentiate itself by focusing on selling food products and opening stores in urban areas.^[4]

Company Overview

FDO owns and operates a chain of over 6,600 discount variety stores throughout the United States. Most of the items in FDO's stores cost between $1 and $10, with a single customer purchase averaging at $9.70 in 2008.^[5] FDO sells merchandise from branded manufacturers as well as its own private label products.^[5] FDO received over $6.98 billion in revenue in 2008, up 2.2% from 2007.^[6]

• Family Dollar Stores company revenue has grown at a CAGR of 7.2% from 2004 to 2008.^[6]
• Since 2004 FDO has opened 1,177 stores, operating 6,643 stores as of March 2009.^[6][1]
• FDO's net income has fluctuated around $200 million since 2004, declining 4% to $233 million in 2008.^[6]

^[6] FDO's sales have grown nearly $300 million from 2006 to 2008, as the firm added nearly 400 stores to its base.

Business Segments

FDO's stores carry a variety of food products, housewares, clothing, accessories, toys, school supplies, and seasonal goods. The company divides its merchandise into the following segments:

• Consumables (61% of 2008 sales)^[5]: This segment includes groceries, household cleaners, paper products, candy, snacks, health and beauty products, hardware, automotive supplies, pet food and supplies. The consumables segment has grown its share of net sales from 58% in 2006 as FDO has enhanced its focus on food products by adding refrigerated coolers to its stores.^[5]

• Home Products (14%)^[5]: The Home Products category includes blankets, sheets, towels, housewares, giftware, home decor and other related merchandise.

• Apparel and Accessories (13%)^[5]: This group includes clothing for men, women, children, and infants, as well as shoes and fashion accessories.

• Seasonal and Electronics (12%)^[5]: Toys, stationery, school supplies, seasonal goods (think Easter candy and Christmas decorations) and personal electronics (such as pre-paid cellular phones).

^[5] FDO's Consumable segment has grown to a 61% share from 58% in 2006 as the company has launched an initiative to carry more foodstuffs by adding refrigerated coolers to its stores.

Key Trends and Forces

FDO Well-Positioned in Recession

As a dollar store retailer operating in the discounting market, FDO’s customer base is largely of the low-income demographic, with 44% of the company's customers earning a gross income under $30,000 in 2008.^[9] Low-income families are generally more sensitive to declines in disposable income during recessions when unemployment rises, which leaves the possibly negative effect of customers attempting to save money and cut back on non-essential spending. However, simultaneously consumers looking for cheap essential goods (such as foodstuffs and clothing) may head to FDO stores looking for low prices. This is incredibly pertinent since the U.S. has been in a recession since late 2007 and unemployment topped 8% in February 2009.^[10] In 2008, FDO's same store sales grew 2.2% while many other retailers posted falling same store sales, signaling that customers may be switching to low-cost stores such as FDO.^[8]

Low Ability to Raise Prices

Discount retailers often experience difficulty passing on cost increases to customers, particularly "dollar-store" chains such as FDO who by-name are obligated to keeping prices on some products at or under $1. In addition to this obligation, FDO's customers can not afford to pay much more than a few dollars as many earn household incomes at, near, or below the poverty line.^[11] Consequently, input cost increases (such as inventory, overhead, marketing) are difficult to pass on to consumers. Macroeconomic and company specific changes to cost structure, including higher distribution costs related to rising energy prices, and supplier or distributor consolidation may lead to large margin decreases that cannot be offset by price increases. This is particularly relevant to oil prices which increase freight costs and other activities related to getting products from factories to FDO stores. Fortunately for FDO, oil prices have fallen since peaking in August 2008, but the general trend in recent years has been a steady rise in these prices.

^[12]

Enhanced Emphasis on Grocery Products

FDO has been increasing the square footage in its stores dedicated to inexpensive food items for customers, including the addition of refrigerated coolers to stores, a process started in 2005.^[4] At the end of FY08, 5,600 stores had the coolers, which has played a major role in the expansion of the Consumables product segment from less than 58% in 2006 to over 61% in 2008.^[5] Despite adding onto sales, groceries typically earn very low margin as food must be turned over at a high rate and the industry is a competitive, price-sensitive businesses, so the company assumes something of an opportunity cost and risk by allocating more of its floor plans to food products.

Competition

As a dollar-store retailer, FDO faces direct competition from other dollar-store chains such as Dollar Tree Stores (DLTR) and Dollar General (DG). From a broader view as a discount retailer, Family Dollar Stores faces significant competition from big-box sellers like Big Lots (BIG), Wal-Mart Stores (WMT) and Target (TGT), whose lager bases allow them to extract value in their inventory purchases and pass these savings on to consumers. FDO, however, attempts to differentiate itself with its smaller-format stores that enable the company to open stores in most rural, small town, and urban markets while incurring less in overhead costs. Along these lines, the company is more focused on urban areas than Wal-Mart, which has traditionally focused on dominating rural and small-town markets. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale (though, to be sure, with over 6,600 stores it has some).

Note: All data for end of company's respective fiscal 2008 year, except Dollar General which has not released full data for FY08.

Footnotes

1. ↑ ^{1.0 1.1} Family Dollar Stores (FDO) Press Release, Second Quarter Earnings Release 2009
2. ↑ Family Dollar Stores (FDO) 10-K 2007, General, pg. 7
3. ↑ WSJ.com, "NBER Makes It Official: Recession Started in December 2007", December 1, 2008
4. ↑ ^{4.0 4.1} Family Dollar Stores (FDO) 10-K 2007, Current Strategic Initiatives, pg. 8
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8} Family Dollar Stores (FDO) 10-K 2007, Merchandise, pg. 10
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6} Family Dollar Stores (FDO) 10-K 2007, Selected Financial Data, pg. 23
7. ↑ FDO Q309 10-Q
8. ↑ ^{8.0 8.1 8.2} Family Dollar Stores Historical Same Store Sales
9. ↑ Family Dollar Stores (FDO) 10-K 2007, Our Customers, pg. 7
10. ↑ U.S. Bureau of Labor Statistics, Economic News Release February 2009
11. ↑ U.S. Census Bureau, Poverty Measures
12. ↑ Historical Crude Oil Prices
13. ↑ Dollar Tree Stores (DLTR) 10-K 2008, Income Statement, pg. 18
14. ↑ BigLots (BIG) Press Release, "Big Lots Reports Record Results"
15. ↑ BigLots (BIG) Historical Same Store Sales
16. ↑ Dollar General Fourth Quarter 2008 Press Release